"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Wednesday, May 7, 2014

Fed Chairwoman Janet Yellen was out today and sounded an upbeat assessment on the US economy, faulting the severely cold winter months earlier this year on the spate of poor economic numbers for much of Q1. Traders took that as a clear sign that the Fed is going to continue winding down its QE program, bringing it to an end later this year. She did however emphasize that it would be " a considerable time" before any interest rate hikes would occur after QE ends. In other words, while the Fed may be slowly turning off the liquidity spigot, they do not see the economy strong enough to handle higher interest rates. Yellen also stated that most of her fellow Fed officials expected to normalize monetary policy in 2015 or 2016. That still is quite a ways off and a lot can happen between now and then. Regardless, gold moved lower as once again investors opted to view the testimony as further evidence that one of the supporting factors behind a higher gold price is going to be eventually removed. Apparently the equity markets did not like that either, at least the S&P 500 did not seem to as it continues to waver back and forth between slight losses on the day and slight gains at this point in the session.You'll note on the gold chart that once again gold has failed to penetrate an overhead resistance level and is now retreating lower. It continues to remain mired in this range trade. The ceiling is now just shy of $1320 with the floor near $1280 and extending down towards $1265 or so. Any CLOSING BREACH of $1280 and the odds will favor a new leg lower in gold. Bulls are once again on the ropes and will need some flare up over in Ukraine to bail them out.

Traders/Investors continue to closely scrutinize Chinese economic data for confirmation of slowing growth. Generally speaking, when they get that, they look to sell copper and of course, silver.Copper prices are thus highly sensitive to any data coming out of China with copper bulls very nervous about getting too aggressive in the face of any suspected slowdowns in the Asian giant's economy.

Speaking of Chinese data, the China Gold Association reported that Q1 gold demand was essentially flat compared to last year when total gold consumption there rose 32%. The sum total demand for the January - March period was up 0.8% at 323 metric tons. Gold jewelry demand remains strong but it was bar demand that got hit - it fell 44%. Dow Jones made an interesting note that the Association's report was very much in line with the World Gold Council's recent April report which suggested flat demand for gold from China this year. Keep in mind that while gold demand is not soaring, 323 tons in the first quarter is not exactly a trifle.

Still, the takeaway, at least for me, is that without geopolitical-event related support, gold is going to new more than a few new friends among Western-based investors. Asian demand has always been the key to producing bottoms in the gold price but even more importantly, it has been helping to offset reduced Western-investment based demand for the metal. Some feel that the drain on the giant gold ETF, GLD, has been the source of a great deal of this Asian-based demand. If that demand falters, or better yet, if the RATE OF INCREASE slows, then that is not conducive to higher gold prices.

I note with great interest that GOLD BAR demand dropped significantly compared to the same period last year. There have been rumblings that China is supposedly going to increase its official gold holdings in preparation for making the Renminbi ( Yuan ) more widely accepted in international trade. etc. This morning's data would suggest otherwise, at least for now. Of course China is not going to telegraph in advance that they might want to buy large quantities of gold. All that would do is make them pay a heck of a lot more for it. Still, that drop in gold bar demand is noteworthy and should not be ignored especially with GLD reported holdings heading south. The Laws of economics still apply to gold - falling demand without a decrease in supply means lower prices. Either supply must shrink or demand must increase, or a combination of both must occur, to move the price higher.Oil prices moved higher today as the government reported a drop in inventories of crude when traders were expecting a build. The 1.8 million barrel drawdown is the first in a month long series of builds. Sadly for we consumers, that kicked unleaded gasoline prices up a bit breaking the string of daily lower closes. Soybeans are back to playing their yo-yo games. After plunging early in the session, bulls managed to take them back up nearly erasing the losses. Within minutes, back down they went again. By the way, this is one of the reasons I continue to mock those who advance the thesis that any sharp move lower in gold ( aka 'Flash Crash' ) is evidence of the government-sanctioned bullion bank ransacking of the gold price. The sheer ferocity of these insane plunges in price and then equally violent rebounds higher in so many of our commodity markets on an almost daily basis is the new normal, thanks to the maddening proliferation of computers doing the "thinking" for hedge fund managers, whom by the way, if the data is accurate, and I have no reason to doubt it, are not exactly making a killing in the markets these days. Many of them are losing money which is to be expected when they cannot find a market with a trend. Their computers are too stupid to understand how to trade markets in a range making them vulnerable to constant whipsaws and compounding their losses. Chalk up for one us old dinosaurs also known as "discretionary traders" meaning that we actually analyze and think before we initiate a trade and not just blindly follow some damned machine. I have said it many times here that it does not take much in the way of trading skill to pile on huge positions in a market that is trending when you know that all the rest of the computers out there are going to be sending the same signal at the same time. All that is then required is to then push prices higher or lower, knowing that the rest of your industry will be doing likewise with the result that it makes one look like an investing/trading genius. The US Dollar managed to blip higher today on the heels of Yellen's comments. I am reading this slight firming as traders interpreting her comments as evidence that rates will rise here in the US well before they do elsewhere in Europe, Britain or Japan. Still, the Dollar is flirting with some important downside chart support. I still believe that were to Euro to somehow reach 1.40, all manner of bloody hell is going to be let loose among Eurozone manufacturing and exporting interests. They do not want a Euro that strong but for now, the ECB, other than saying a few things about that, are apparently content to tolerate the currency near current levels. Look at the gold price in terms of the Euro and you can see that it too is going nowhere. It is however perched just above a key chart support level near 920. Will it bounce or will it break through? That remains to be seen. If it does fall through this level, it would more than likely occur simultaneously with a downside breach of $1280 in Dollar terms for gold which would push the market into the stronger potential for a trending move lower. The jury is still out however.

The jury does seem to have come in however on the mining shares based on the HUI. The index has fallen through chart support near 220. The day is not finished yet so the possibility exists that the index could rebound prior to the closing bell. However, if it does not, it would tend to augur further losses ahead for both the shares and the metal. There is a band of light support near 218; if that fails to force a rebound higher in the shares, then 216 comes into play.

Silver once again failed to reach $20, much less penetrate that level. It looks as if it is back to testing the $19 region, which has thus far been able to hold it except for a brief penetration before the price rebounded. I am curious to see if copper prices can hold above $3.00 and am wondering what might happen to silver can it not. Hogs got whacked with an ugly stick today as traders bleed out some of the premium in those summer months. I keep urging hog producers out there to secure some 4th quarter hedge coverage. Do not let those good profits get away from you. Lock in some expected 4th quarter production. Gamble if you must but not without securing a portion of protection. Specs - I am speaking to producers here who are bona fide hedgers, not you.Let's see how the dust settles today and how time constraints are for me. Perhaps I can post some additional comments depending on what happens later.

If you have benefitted from some of the articles posted here and would like to express your gratitude to Trader Dan for freely sharing some of the market wisdom he has gained over his long trading career, please feel free to Donate.

About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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